Why Currency Wars May Be a Mistake

A weakening currency is a good thing, because it boosts a country’s exports, right? Well, not necessarily.

Financial analysts have written endlessly over the last few days and weeks about countries engaging in competitive devaluations to cheapen their currencies so their exporters’ goods and services cost less in foreign markets and they can therefore sell more of them.

The U.S., Japan and the U.K. have all been accused of taking part, among others. The resulting strength of the euro could well have been on the agenda of the euro-zone finance ministers’ meeting in Brussels that starts Monday. And currency wars are almost certain to be discussed at a meeting of the Group of 20 finance ministers and central bank governors from 20 major economies that takes place later this week.

The “G-20 gathering in Moscow will be overshadowed by talk of currency wars. But in our view, competitive exchange rate devaluations do not pose a significant threat to the global recovery,” said Andrew Kenningham, senior global economist at the Capital Economics consultancy, in a note to clients.

Moreover, economic theory doesn’t support the idea that a weaker currency is an advantage in all cases. And Germany’s Bundesbank, for instance, was widely believed to support a hard Deutschmark in the days before the introduction of the euro to help keep a lid on inflation.

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